Albert Einstein is credited with saying, “The hardest thing in the world to understand is the income tax.” Indeed, for many taxpayers, figuring something like AGI may as well be E=MC2.

In this post, we’re not advising you how to file your taxes or maximize your refund. But the St. Louis Fed is committed to helping people of all ages better understand personal finance. So, let’s demystify some income tax basics.

Understanding Taxable Income

Federal individual income tax must be paid to the U.S. government on all forms of annual earnings that make up someone’s taxable income.

It begins with gross income, which is everything you earn for the tax year. Broadly, this includes wages, bonuses, interest income, rental income, capital gains and more. And there are Internal Revenue Service guidelines for who must file. For example, a single person who was under 65 when 2017 ended would typically file a return for tax year 2017 if his or her gross income was at least $10,400.

Then you figure adjusted gross income (AGI) by making certain adjustments, or deductions. These include health care savings account deductions, student loan interest, contributions to certain retirement accounts, and other qualifying deductions.

Additional exemptions, deductions and credits can come into play to further reduce tax liability:

The Federal Income Tax Is Progressive

According to the Office of Management and Budget, the federal government estimates it will collect nearly $1.7 trillion in individual income taxes for fiscal year 2018. Meanwhile, the IRS expects that about 155 million individual tax returns will be filed during the 2018 tax season.

Who’s paying, and roughly how much? It’s important to understand that federal individual income tax is a progressive tax based on the ability-to-pay principle: A progressive tax is a tax in which higher-income earners pay a larger percentage of their income in tax than do lower-income earners.

The Tax Foundation reports that the top 50 percent of income earners paid about 97 percent of all federal income taxes in 2015. The figure above shows a more detailed distribution of tax paid by income group.

Tax Rates Are Based on Tax Brackets

The IRS categorizes taxable income into tax brackets with progressively higher rates. For tax year 2017 (with a filing deadline of April 17, 2018), the seven tax brackets range from 10 percent to 39.6 percent.

Taxable income that falls within a particular bracket is taxed according to the rate for that bracket. Additional income is taxed according to the rate in the next tax bracket. So, say you’re a single person who had $10,000 worth of taxable income in 2017. You’d pay a tax rate of 10 percent on the first $9,325, and then a tax rate of 15 percent on the remaining amount.

Tax Brackets for Tax Year 2017

Rate

Single

Married Filing Separately

Married Filing Jointly

Head of Household

10%

$0-$9,325

$0-$9,325

$0-$18,650

$0-$13,350

15%

$9,326-
$37,950

$9,326-
$37,950

$18,651-
$75,900

$13,351-
$50,800

25%

$37,951-
$91,900

$37,951-
$76,550

$75,901-
$153,100

$50,801-
$131,200

28%

$91,901-
$191,650

$76,551-
$116,675

$153,101-
$233,350

$131,201-
$212,500

33%

$191,651-
$416,700

$116,676-
$208,350

$233,351-
$416,700

$212,501-
$416,700

35%

$416,701-
$418,400

$208,351-
$235,350

$416,701-
$470,700

$416,701-
$444,550

39.6%

$418,401
or more

$235,351
or more

$470,701
or more

$444,551
or more

Federal Reserve Bank of St. Louis

NOTES: This table shows brackets for those returns due April 17, 2018. Last December, President Donald Trump signed the Tax Cuts and Jobs Act, which makes many changes for tax year 2018 (due in 2019). The seven income tax brackets are retained, but tax rates are lowered and income tiers are adjusted.

Previous Post

Next Post

Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and
courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted.
We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:

Vulgar, obscene, profane or otherwise disrespectful or discourteous

For commercial use, including spam

Threatening, harassing or constituting personal attacks

Violating copyright or otherwise infringing on third-party rights

Off-topic or significantly political

The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters,
so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting
comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and
the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments
for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may
have in any comment you submit.

The St. Louis Fed uses Disqus software for the comment functionality on this blog.
You can read the Disqus privacy policy. Disqus uses
cookies and third party cookies. To learn more about these cookies and how to disable them,
please see this article.

About Open Vault

The St. Louis Fed Open Vault blog explains everyday economic concepts and provides a look at the people and programs that make the St. Louis Fed central to America’s economy.

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.